The document summarizes features of the growing market for asset-backed securities (ABS) in Brazil. It notes that while securitization has existed for over 30 years, receivables investment funds (FIDC) introduced in 2001 are now the leading vehicle for issuing ABS in Brazil. FIDC function similarly to mutual funds and allow for senior/subordinated security structures. Despite a maturity mismatch between underlying receivables and outstanding certificates, FIDC are actively managed through revolving and amortization periods. The market has attracted investors through sound regulation and tax benefits, growing from $400 million issued in 2002 to $9.8 billion in 2011.

1. Asset Back Securities in Brazil1
Alan De Genaro2
The aim of this note is to describe some features for
the fast growing market of ABS in Brazil.
While the process of securitizing has been around for over 30 years, the securitization is relatively new in Brazil.
Receivables investments Funds (FIDC) were introduced in 2001 and constitute the leading vehicle to issue Asset
Back Securities in Brazil. Since then, the process and structure have evolved significantly, and just to mention the
market evolution, ABS instruments raised USD 400 million in 2002 in primary placements while in 2011 this value
climbed to USD 9.8 billion. In simplest terms, FIDC are organized as regular mutual fund, therefore bankruptcy
remote entities. Additionally, mutual funds can be either open or closed-end.
Even though Special Purpose Entity (SPE) is allowed, they don't have the benefits from differentiated tax treatment
granted to FIDCs, therefore, in its majority, securitizations are performed trough FIDC. According to the Brazilian
regulation, to be recognized as a FIDC, the fund must have at least 50% of its collateral comprised of credit
receivables such as personal loan, corporate loans, auto loans and trade receivables among other. The balance can be
used to purchase government bonds, CD’s and other fixed income instruments.
A two tier senior/subordinated is the typical structure adopted so far, but alternative arrangements as
Senior/Mezzanine/Subordinated are also allowed. Subordinated tranches represent the principal form of credit
enhancement in FIDCs and traditionally most of those securities are acquired by the originator, as a mechanism to
mitigate investor’s concerns about being picked off when buying such instruments.
FIDC are pay-though structures where distributions to investors are not correlated with payment dates of its
collateral. FIDC are fully funded but differs from other ABS, like Mortgage Backed Securities, because its
underlying credit receivables have a relatively short life, typically eight to ten months, whereas the outstanding
certificates typically have three, five, or ten year to maturity. As a result of this maturity mismatch, each series
issued is structured to have a revolving period and a controlled amortization period, therefore, FIDC are classified as
actively managed portfolios.
As heritage of its inflationary past, investment instruments in Brazil are in general floating-rate. As a way to
compete with well-established investment alternatives, FIDC-issuers tend to pegged FIDC’s remuneration to the
overnight interest rate in Brazil, CDI. Unlikely cash CDO in the US, FIDC are not subjected to performance tests
(waterfalls) that can trigger the early start of the amortization phase if the deal performs poorly.
In terms of FIDC-holders, after a modest beginning with a handful of investors, the current breakdown includes
investment funds, institutions related to the originator, pension funds and foreign investors as the main holders.
Despite the fact that retail investors, in general, are not allowed to invest directly into FIDCs, unless he/she is an
accredited investor, them do invest in FIDC’s indirectly buying shares of other investment funds which hold FIDC
in its portfolio.
As future challenges to FIDCs, one can mention the usage of mezzanine tranches, which tend to benefits the
originator with greater capital and attract more sophisticate investors looking for more returns. As a second
challenge, one can mention the development a liquid secondary market for FIDCs which allows a better price
discovery after the initial placement.
A good return over a period of time with a sound and safety regulatory environment is what has attracted investors
to trade FIDCs in Brazil. Finally, it is worth to mention that no-resident investors are granted with several tax
exemptions.
1
Article prepared for the Finance Concept newsletter.
2
BM&FBOVESPA and Visiting Scholar at NYU's Courant Institute. The views and opinions expressed herein are those of the
author exclusively. E-mail: degenaro@cims.nyu.edu